As the end of 2012 draws near, the financial headlines are worrisome. The U.S. fiscal cliff looms, uncertainty in Europe and Asia continues, and warnings multiply saying that Canadians are not immune to the upheaval.
How should average, middle-class Canadian taxpayers sift through the headlines and manage their finances? Here's what the experts think.
The coming year will be a time of financial uncertainty and slow growth, but Canadian economists don't predict a recession. The most important message for individuals to heed is to take active control of their own finances, they say.
Benjamin Tal, deputy chief economist with CIBC World Markets, sees 2013 as a "transition year."
"It's a year that will not be great. We could have many uncertainties globally that could shift the paradigm in a very negative way. I'm talking about the fiscal cliff in the U.S., for example," he says, referring to the tax increases and spending cuts set to take place simultaneously unless a bipartisan deal is reached by Jan. 1. Many say the United States could be pushed into recession.
While economic growth in China is slowing, Mr. Tal feels that China will likely achieve a soft landing. "They have the political mind to do so; they have the fiscal ability to do so."
He says once some of these issues are sorted out, "we will be breathing a little easier" by the second half of 2013, setting the stage for improved economic growth in 2014.
Paul Ferley, assistant chief economist, Royal Bank of Canada Capital Markets, says he sees moderate growth in Canada next year – between 2 and 2.4 per cent. The main source of growth will be business investment, he adds.
He also assumes weaker growth in Europe than North America and some improved growth in China – somewhere around 8 to 8.5 per cent. But he views Canada as one of the stronger economies within the Group of Eight in 2013.
"It hasn't had to deal with the kind of fiscal imbalances we have seen in other jurisdictions. There is less pressure on Canada to deal with fiscal restraint. That will go a long way to help sustain growth here."
Lindsay Meredith, professor at Beedie School of Business Administration at Simon Fraser University in Burnaby, B.C., says he sees a continuation of a fairly stable course in 2013, with Canada feeling some effects depending upon what happens south of the border and overseas. However, he agrees that China is improving and says if the United States continues to have an economic recovery, it will help Canada's economy take off again.
The experts warn that the most crucial challenge for most Canadians in 2013 is to get debt levels under control.
"What is the real bug in the Canadian structure? It would be the record high debt rates being held by middle-class taxpayers," Dr. Meredith says.
He recommends that consumers pay off debt and avoid taking on more, because the consensus is that interest rates will not remain this low for much longer.
"If interest rates begin to rise, that could have a real effect on Canadian consumers, because once you are highly leveraged, any change in interest rates upwards, if you already have a paycheque that is almost totally allocated, you are walking a high wire without a net."
Mr. Tal believes 2013 will be the last year of extremely low interest rates. He recommends that consumers reduce debt as much as possible. If you must borrow, lines of credit are among the cheaper options, especially if you can get a low rate such as prime plus one, experts agree.
Reducing debt successfully can mean paying off the highest interest credit cards first, eliminating use of department store credit cards or money marts, and finding ways to make more money.
Entering the housing market
Views on the Canadian housing market are mixed. Some economists say Canada is in the middle of a bubble, but most agree that the market will soften somewhat in 2013, especially in the hot pockets of Toronto and Vancouver.
Perry Sadorsky, associate professor at the Schulich School of Business in Toronto, says the beginning of 2013 will not be a great time to buy or sell a home because it looks as though the market is beginning to cool.
Dr. Sadorsky recommends a wait-and-see approach for the average Canadian. He says that there could be two scenarios – either this is the beginning of a new, softer real estate market or just a hiccup.
Howard Kabot, vice-president of financial planning with RBC Wealth Management, says that individuals have a lot to consider when getting into the real estate market. Owning a home is not necessarily the safe bet it once was in terms of making a solid investment that will increase in value and provide a return on that investment, he says.
"I look at it more as a lifestyle decision as opposed to an investment decision."
Homebuyers need to consider how much debt they can take on and especially whether they will be able to continue making mortgage payments if interest rates rise.
For Canadians who have income they can allocate to investing, the experts say there are several areas that are stable in 2013.
One good bet is dividend-paying companies, the economists say.
Mr. Sadorsky recommends the Canadian financial service sector and telecom sector. "What you want to look for are good quality companies that aren't going to go out of business that pay good dividends."
Mr. Kabot says dividend paying stocks from blue-chip companies are positive because they are generally not as volatile as other stocks and investors can get a decent yield of 2 to 4 per cent or higher. Mutual funds are another safe bet if you are a less risk-taking investor.
But there are also stocks to avoid in the new year, Dr. Meredith says.
"For the average middle-class taxpayer, stay away from volatile stocks," he says. Those include penny stocks, mining, gold and oil.
All agree that tax-sheltering investments including RRSPs and RESPs are a good place to park money – and they will provide for your family in the long term.
Economists say that because of slow growth in 2013, it will be a lacklustre year for consumers as most people will be trying to pay off debt and will avoid buying big-ticket items including cottages, vacations, boats or cars.
Dr. Meredith says the only Canadians who should be considering items such as vacation recreational vehicles or flatscreen televisions are boomers whose income is secure.
Those who should not? "People who are extremely debt-allocated, including young people with huge mortgages, car loans etc."
The only big-ticket item that people should purchase next year is a car, but only out of necessity – that is, need versus want, because a car is a depreciating asset. If you do need a car, Mr. Kabot says, try to stay away from leases. Rather, buy the car outright and "drive it as long as you can." Cars these days are well made and can last the buyer 10 to 15 years, he says.
His best advice for next year? "Live within your means."